While focusing its North American logistics efforts on more lucrative, higher premium products, tyre manufacturer Pirelli is opting for a ‘local for local’ philosophy as it expands into emerging markets. Tony Danby looks at the company’s LSP selection criteria and its investment in new plants.
Pirelli, one of the world’s largest tyre manufacturers, has like many companies readjusted its operations to account for the radically shifting economic climate in North America. From the depths of the recession in 2009, through recovery in 2010 and the early part of this year, and into the current volatile conditions, Pirelli has had to cope with moving increasing volumes of tyres alongside wildly shifting commodity prices, including fuel and rubber.
As the global financial crisis swept across North America’s tyre sector, large volumes of stocks piled up and margins were squeezed as orders dried up. Some companies were forced to sell tyres at a discount, while margins for aftermarket tyres were deflated ever lower. At the same time, many companies that transported or handled tyres were forced to shut or shift to other businesses. Moreover, many tyre manufacturers such as Pirelli decided to focus on premium products and to trim logistics costs in North America.
After a period of low sales in 2009, in which carmakers weren’t taking orders, large stockpiles of tyres built up. “The replacement demand dropped off, expenditure shut down, layoffs occurred, some fire sales took place, while at the same time warehouses were jammed and running out of space,” says John Godfrey, responsible for Pirelli’s logistics and purchasing in the NAFTA region (the US, Canada and Mexico). “Times were certainly rough,” he recalls.
But gradually, demand began to pick up again in the North American market and strong growth occurred in emerging markets. This forced some companies to search for more logistics capacity and to scramble around to find new logistics providers.
Now, the market has gradually recovered and stabilised. Pirelli is currently handling 6.8m tyres across its NAFTA operation, up about 700,000 tyres compared to 2010. Of this total, some 5.6m tyres are dedicated solely to the US and Canadian markets. Godfrey says that Pirelli imports around 90% of these tyres–mainly from Brazil, China, Germany and Romania–with lead times of up to 60 days. The UK could be counted as a relatively close location from which Pirelli transports tyres, with lead times of around 30 days, he adds. Pirelli, which was founded in 1872, has decided to focus its logistics efforts on higher premium tyres such as high performance or ultra-high performance tyres–typically used for SUVs or sports cars–which now account for the bulk of its North American business. “The aim is not to have high logistics costs on transporting low-margin tyres and to focus on more lucrative higher-margin products,” says Godfrey.
As well as the high premium tyres, much of the OEM volume goes to customers with long-term contracts to whom Pirelli supplies for different models of vehicles. There is now pressure to push up the prices, he says.
Over the years, Pirelli has made various moves to reduce logistics costs and improve service levels. Godfrey explains that the company recently undertook a 3PL tender with the aim of reducing fixed costs, which led to shutting down some warehouses in the US, such as in Kentucky and Michigan. Pirelli currently has two warehouses in Georgia and California, while the tyremaker has only a single North American factory in Rome, Georgia.
In 2005, Pirelli switched from managing its own warehouses to using a logistics service provider, Kuehne + Nagel (K+N), which is now Pirelli’s main provider for warehousing and distribution in the US. The LSP manages over 600,000 square feet (56,000 square metres) of warehousing and was recently awarded a new three-year contract with Pirelli.
Pirelli also demands strict KPIs (Key Performance Indicators) for on-time deliveries and non-conformities, such as missing tyres, wrong deliveries or non-labelling. According to Godfrey, the level of delivery remains high at 99.7% for on-time deliveries, while its non-conformity rating is 0.04% in the US. In Canada, when Pirelli began monitoring these KPIs a few years ago it had a 70% on-time delivery rate. That now stands at 98%. “This is good for a country that often has challenging snowy, icy conditions,” says Godfrey. The company is also now starting to undertake tracking KPIs in Mexico.
Pirelli, using its modular integrated robotised system (MIRS), produces some 400,000 ultra-high performance tyres in Georgia, which it supplies to the North American OEM market including Mercedes, BMW and Ford, as well as to replacement market customers. The factory was initially opened to be near two major customers–Mercedes in Alabama and BMW in South Carolina–and according to Godfrey there are currently five lines and a compound mixer in operation, although the plant is not operating at its full capacity.
Godfrey says that Pirelli also undertakes direct orders from customers. For instance, customers can make an order straight to an overseas factory, thereby cutting some unnecessary warehousing and distribution costs. “As Pirelli makes savings, it can give discounts to the customer,” he says.
Pirelli also has a MRP system to monitor and optimise raw material stock on a real-time basis. Moreover, the company centrally has the muscle and volume to constantly renegotiate raw material contracts to secure lower costs and observe careful benchmarking. In Europe, a Milan-based control tower system also allows Pirelli to monitor every truck within the continent. This should be rolled out in the US in 2012.
Pirelli also has three warehouses in Canada. Local 3PL Pival International manages warehousing and distribution for warehouses in Montreal and Oshawa, near Toronto. But elsewhere, as the company was shipping tyres from China to Montreal, it didn’t make sense to send tyres back to western Canada. As a result, after assessing the costs, Pirelli set up another Canadian warehouse in Vancouver, with DB Schenker handling the facility thanks to its knowledge of the region.
Pirelli also currently uses a local 3PL in Mexico, while it uses Germany’s DHL/Exel for distribution to Discount Tires, its largest customer in the US. When it comes to shipping, Pirelli uses all of the major ocean carriers.
Godfrey warns that commodity prices are significantly impacting the business as fuel and rubber prices have climbed higher. A team in Singapore is tracking prices in real time and buying natural rubber supplies, as commodity prices are vital for the company. “Higher prices for fuel also added an additional reason to ensure that no dollar is wasted in logistics,” he adds. “As commodity costs go up, we need to find ways to make savings in logistics, without raising costs on the customer side as much as possible,” Godfrey says.
The task of finding good logistics providers is also challenging. Godfrey recalls that Pirelli used to accept a logistics company for a tender without any experience in the tyres business, whereas nowadays the candidate company needs to show a track record. “If a company can’t show experience in handling tyres, then we won’t even consider them,” he says.
The work of handling tyres differs from other products. Firstly, tyres are awkward shapes and usually cannot be put on standard pallets. This means that LSPs need to know how to lace and transport tyres in a truck. They also need to know how to label and identify each item. As tyres are made of flammable rubber, they need to be stored with safety systems in place such as early suppression fast response (ESFR) sprinklers. Tyres also need to be separated from certain materials, such as food or fabrics, as the smell can cause damage to nearby products.
Even labelling can be difficult, so the company has a project to attach barcodes to the beads–the metal parts of the tyre– during the manufacturing process to register vital details such as the age, the type of tyre or tread pattern, the warehouse and/or details of the sold-to customer.
“There are too many LSPs out there with experience, so why waste time looking at companies that don’t have the knowledge? Companies such as K+N, Ceva and DHL/Exel all have tyre experience,” he adds.
Pirelli and K+N have worked together in North America for seven years. Tony Vassallo, K+N’s vice president for transportation and contract logistics in the US, says the firm handles all of Pirelli’s warehousing and distribution.
Vassallo explains that the large retailers have large sales cycles–especially at the weekends–and the challenge is to get tyres to them during the week to replenish stocks for the next weekend. “If we fail to deliver to the retailer, this directly hurts Pirelli, because the retailer will need to sell another competitor’s tyres. Service is essential,” he adds.
The type of dealership or retailer also varies. K+N needs to deliver to some retail customers without any docking facilities. To avoid disrupting the retailer’s sales activities, K+N needs to plan when to arrive and how to deliver the tyres. The company must also know how to transport, stack and arrange tyres. For instance, 10-20% of the volume can be lost by not stacking the tyres high enough in the truck, he explains.
Vassallo recalls that, over the years, the two companies have had to adapt to changing conditions. “As the market conditions changed, we also had to be flexible,” he says. “You sign a contract, but often the duration is for many years, so you need to be flexible. It is like drawing a line in the sand,” he adds.
K+N also runs a consolidated control tower he says. “Although everybody [all LSPs] uses this type of information, we aim also to put good people in place in order to be proactive on freight transit. We look at EDIs and ensure exchange takes place on time,” he says.
As with other manufacturers, Pirelli is eyeing and expanding in emerging markets such as the BRIC countries–Brazil, Russia, India and China–where demand is more robust than in more mature markets such as Western Europe and the US.
As global and domestic demand picks up, the company is boosting its production capacities with a large-scale factory and distribution operation located some 400 kilometres from Mexico City, which should begin producing tyres in 2012.
The new factory–located in the city of Silao–will produce high-performance and ultra-high-performance tyres for cars and light trucks. Pirelli will invest some $210m in the factory, with around 700 direct and 300 indirect jobs being created in the local area.
Production at the 120,000-square-metre facility will be gradually ramped up from 500,000 tyres next year, to 5m by 2015. The company is currently holding a tender with local and international 3PLs to provide warehousing and logistics services and the process is expected to be completed by the end of this year.
The Mexico plant will be Pirelli’s eighth tyre manufacturing plant in the Latin American region, with five in Brazil and one in both Argentina and Venezuela. It will also be the tyremaker’s second manufacturing site in the NAFTA region after the Georgia factory. The company has made a further recent acquisition in Russia and has operations in China. The plant in Mexico is part of the company’s moves to be ‘local for local’, as it considers self-sufficiency to be vital in key regions, Godfrey says.
